Higher Cloud Market Share Could Drive The Alphabet Inc Stock

  • The acquisition of Apigee and its large customer base will help Google narrow the wide gap with Amazon.com and Microsoft.
  • Although the Alphabet stock is not cheap in terms of valuations, it's still attractive, given its high growth prospects.
  • The average target price of top analysts is at $942.21, representing an upside of 18% from its September 12 close price.

In its continuous effort to strengthen its cloud platform, Alphabet Inc (NSDQ:GOOG) announced on September 8, its plan to acquire the application program interface (API) company Apigee (NSDQ:APIC) for $17.40 per share in cash, for a total value of approximately $625 million. It is the largest acquisition Google has made in over two years since they purchased Skybox for $500 million.

Diane Greene, SVP of Google’s cloud businesses explained:

 “Companies are moving beyond the traditional ways of communicating like phone calls and visits and instead are communicating programmatically through APIs. APIs allow the company’s backend services to talk to the mobile and web-based apps used by their customers and partners. Instead of the doctor phoning a prescription into the pharmacy, they can use an app that talks to the pharmacy through an API. Apigee easily enables this by providing a comprehensive API platform that supports secure, stable, multi-language, dev, test, publish and analytics capabilities.”

It is worth noting that Google is not paying a high premium for the deal, just 6.5% higher than the close price of $16.34 for APIC shares on September 7, the day before the deal was announced. Usually, in this kind of an acquisition, there is much higher premium. Oracle (NYSE:ORCL) for instance is paying a much higher premium to acquire NetSuite, a cloud company. On July 28, Oracle announced that it is buying Netsuite (N) at $109 per share in cash, a premium of 19% to NetSuite's closing stock price of $91.57 on the day before the announcement. NetSuite's acquisition by Oracle is a much bigger acquisition, valued at about $9.3 billion. In my opinion, the reason for this is the intent of Apigee's management to take advantage of the fact that the company's stock has soared an impressive 103% from the beginning of the year until the day before the announcement of the deal.

In my opinion, Google's decision to acquire Apigee is a smart move by the company. After all, analysts have expected Apigee's sales to increase by 31% in 2017, and its earnings per share to grow by 32.5%. The company went public in 2015, and it had achieved revenues of $66.9 million in the nine months ended April 30, representing an impressive growth of 34% year-over-year. Apigee provides an API platform that can be used by companies to make their services available on multiple mobile devices, and it has a strong customer base. The company has more than 300 customers including AT&T (NYSE:T) and pharmaceutical giant Walgreens Boots Alliance (NSDQ:WBA), and that number is expected to continue to grow, as many companies are increasingly using business applications in the cloud.

Google has been a late entrant to the fast-growing highly-competitive cloud market. However, the addition of Apigee and its large customer base will help Google narrow the wide margin with Amazon (NSDQ:AMZN) and Microsoft (NSDQ:MSFT). According to Synergy Research Group, Amazon Web Services (AWS) had a 31% share in the cloud market followed by Microsoft's Azure 9%, IBM Inc. (IBM) 7%, and Google 4%. 

Alphabet Inc Stock Performance

Since the beginning of the year, Alphabet's stock is up 2.7% while the S&P 500 Index has increased 5.6%, and the Nasdaq Composite Index has gained 4.1%. However, since the beginning of 2012, the Alphabet Inc stock has gained by 147.4%. In this period, the S&P 500 Index has increased 71.7%, and the Nasdaq Composite Index has risen 100.1%. According to TipRanks, the average target price of top analysts is at $942.21, representing an upside of 18% from its September 12 close price, which appears reasonable, in my opinion. 

Alphabet Inc Has Delivered Solid Growth

Google has recorded substantial growth in the last few years. The company's annual average sales growth over the last five years was very high at 20.7%, and the average EPS growth was high at 11.7%. The average annual estimated EPS growth for the next five years is also very high at 18.1%.

Valuation

According to its valuation metrics, the Alphabet Inc stock is not dirt cheap, but it is not very expensive either. The trailing P/E is 30.95, and the forward P/E is 19.65. The price to sales ratio is 6.71, and the price to book value is 4.29. Furthermore, the price to cash flow ratio is 33.14, the Enterprise Value/EBITDA ratio is 17.52, and the PEG ratio is 1.30.

However, Alphabet's Margins and Return on Capital parameters have been much better than its industry median, its sector median, and the S&P 500 median as shown in the tables below.

2016-09-13 09_09_37-Photos 2

Source: Portfolio123

Conclusion

In my opinion, Alphabet's decision to acquire Apigee is a smart move by the company. Google has been a late entrant to the fast-growing highly-competitive cloud market. However, the addition of Apigee and its large customer base will help Google narrow the wide gap with Amazon.com and Microsoft. Although the Alphabet stock is not dirt cheap, it is still attractive, considering its high growth prospects. The average target price of the top analysts is $942.21, representing an upside of 18% from its September 12 close price, which appears reasonable, in my opinion.

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